The Mortgage Professor: America Ill-Prepared For Next Financial Crisis

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WWR Article Summary (tl;dr)Jack Guttentag, professor emeritus of finance at Wharton says “forecasting a financial crisis is much like forecasting a meteorite hitting the earth: We can be sure that it will happen but we don’t know where and we don’t know when.”

The Mortgage Professor

“Will we have another financial crisis?”

“Are we prepared for one?”

These two questions appear in my mailbox with the greatest frequency.

The answers are very straightforward: We will have another crisis, and we are not prepared for it.

I have lived through three financial crises during my life. The worst occurred during the 1930s and was triggered by a stock market crash followed by widespread runs on banks.

The aftermath saw the creation of the Federal Deposit Insurance Corporation, Federal Housing Administration, Fannie Mae, the Federal Home Loan Bank System, or FHLBS, and the Homeowners Loan Corporation, or HOLC. The first three are still with us.

The second crisis occurred during the early ’80s and was triggered by a rapid rise in interest rates that depleted the capital of the savings and loan industry. The aftermath saw the demise of both the industry and the FHLBS, which among other things had been the industry regulator.

The third crisis began around 2008 and was triggered by a sharp drop in house prices, which led to an explosion of mortgage defaults, the insolvency of many firms that originated mortgages or invested in mortgages or mortgage securities, and widespread market disruption following the failure of one major player, Lehman Brothers. The aftermath saw the Dodd-Frank legislation, which created the Financial Stability Oversight Council, Office of Financial Research and the Consumer Financial Protection Bureau. Dodd-Frank also mandated significant changes in powers and responsibilities of most of the existing regulatory agencies, including the FDIC, Federal Reserve and Securities and Exchange Commission.